Polling the experts

Why do top economists think the recovery has been so slow?

EVERY four years, we poll the top American economists to get their views on the presidential election. This week’s print edition explains many of the results from our 2012 survey, which was conducted between September 18 and September 28. One particularly interesting set of results was generated when we asked economists why they thought the recovery had been so slow. This chart shows how various subpopulations rated the importance of six factors we chose:

Averages can tell you a lot but sometimes it is even more interesting to look at the distribution of all the responses, which you can see in this chart:

As you can see, there was a broad consensus on the relative importance of most issues. The two exceptions were fiscal austerity and policy uncertainty. Both factors got a grade of 4 or 5 from around 40% of the sample but also got grades of 1 and 2 from another 40% of the sample. There was some overlap—about one-fourth of people who thought fiscal austerity was important also thought uncertainty was holding back the recovery, and vice versa. Nevertheless, the economists’ political preferences can generally be predicted by their beliefs about why the recovery has been so anemic. In particular, those who think that fiscal policy is too tight believe that Mr Obama has a superior grasp of economics than Mr Romney. Similarly, economists who think that policy uncertainty is hobbling the recovery generally believe that Mr Romney has a firmer command of the discipline:

How can we hope to make informed decisions when the experts are this divided on such basic questions?

Oddly the most common suggest - that weak growth is inevitable after a financial crisis is not an explanation at all."

I think what they are saying is that weak growth was inevitable precisely because the financial crisis led to an enormous increase in both the private and public debt burden. So yes it is a perfectly good explanation!

Oddly the most common suggest - that weak growth is inevitable after a financial crisis is not an explanation at all. It's an axiom that tells us nothing. Why do they think this? What is the mechanism?

In the UK there is typically faster growth following a recession which gets us back to a shallow exponential trend line that has an r-squared of > 0.99. As far as I can see the USA is the same. The shape of the GDP curve in the UK has changed shape in a way that has never occurred before.

Yes, that is the only way. In addition to their political leanings (most US economists lean to the left), there are at least four different schools of economic thought and many more theories of business cycles.

For anyone wanting to start becoming an expert, I highly recommend Roger Garrison's "Time and Money". Garrison is a prof at Auburn. His book compares three schools of economics, Keynesian, neo-classical and Austrian.

An old book, Hayek's "Monetary theory of trade cycles" (1930's) looks at about a dozen business cycle theories. You can get a pdf copy at mises.org in the literature section.

Actually the article is talking about the situation in the US while you are talking about the UK for which the explanations are very different. Firstly just before and after 08 there was an enormous property price crash in the US (something that still has not happened in the UK). This led to an immediate increase in the household debt burden as many moved into negative equity. This led to a surge in defaults and consequently losses at the banks. Much of this tab was picked up by the taxpayer in the form of TARP.

You are correct in saying that the private debt levels were a problem leading up to the crisis. I should have been clearer though by saying that what changed immediately at the time of the crisis was that the collatoral behind both the household and banking debt(ie. the properties) became quickly eroded. So although the overall private debt levels may not have changed significantly the actual private debt burdens increased massively!! This had the knock on effect of crippling the working/middle classes purchasing power and the banking sectors ability to lend which explains the poor recovery.

This is pretty basic and I would like to think most economists understand this and that its implied when they say weak growth was inevitable after the crisis.

Hayek refused to call himself a conservative. He has a really interesting essay "Why I am not a Conservative." He preferred the term "liberal" as it was understood in the 19th century, but couldn't use that term in the US because it now means socialist. So he didn't call himself anything. He was really a classical liberal.

Hayek's position on intelligence was a little more nuanced than what I posted. You should read his last book "The Fatal Conceit". Yes, he thinks conservatives and classical liberals are intelligent, but his main point is the difference between intelligence and wisdom. The left may have intelligence but lack wisdom. The right may have fewer with intellectual ability, but far greater wisdom. Hayek valued wisdom above intellect. Wisdom requires humility.

" ... the economists’ political preferences can generally be predicted by their beliefs about why the recovery has been so anemic." (MCK)
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I believe you have this backwards. Policy views are the tail and political interests are the dog that wags them. Academics don't choose the party the conforms to their economic view; rather, they choose the economic theory that fits their politics.

That might be a more significant data point if economists were better at predicting major crashes. The vast majority never saw 2008 coming. The vast majority, therefore, do not understand the economy well enough to usefully be able to see the real problems that exist.

So the fact that they "lean to the left" does not lead one to conclude that "the smart people" or "those who really understand the economy" lean left.

I agree. My criteria would be that any economist who did not predict the 2007 credit crunch and 2008 depression is out. It is the largest perturbation of the economy in modern times and anyone who failed to see it coming should no longer have any influence on public policy.

Yes. And I would add that those academic economists are often in the direct employment of business interests that are also political. Reports and opinions from people who do not declare lucrative remuneration packages are held to be suspect in any other field, but economists are reluctant to disclose who is funding their research.

As you will see private debt rose from 130% of GDP in 1987 - to a peak of about 475% of GDP in 2009. Then started to tail off as bankruptcies cancelled out some of the debts. As far as I have been able to ascertain it remains at around the 450% of GDP level - partly because of the finance sector.

In other words UK private sector debt is about £7 trillion or about £2 trillion more than the net worth of the UK (according to ONS figures). By my calculation when the crash hit the UK was 135% mortgaged. I cite Travelodge as an example of the problems. Look them up. Or you could look up Biffa. Too much debt makes profitable businesses insolvent.

Public debt only marginally increased in the UK by comparison and is a rather small fraction of private debt even now.

So there was quite a lot of subtext behind my remark. And I'm deeply frustrated that this story is ignored (or suppressed?) by the mainstream media to the benefit of public policy makers.

I say we have weak growth because in the words of Richard Koo "business is no long maximising profit, it is minimising debt". Private indebtedness at the levels we have siphons off the lion's share of disposable income. Like Koo and others I think we won't see a return to growth for at least a decade. And the model is Japan's 1990-2005 recession which was also caused by a massive build up of private debt.

So pardon me, but the explanation offered is far from good, and worse than weak. It's blind. And we should be terrible worried that economists are blind to debt. They're about as useful as a meteorologist who is blind to water!

Hayek's assertion implies conservatives are not intelligent. Now Hayek was conservative so that implies he was likely to to be unintelligent. If he was unintelligent why should I listen to him? But maybe he claimed to be one of the rare intelligent conservatives. But then he must be arrogant...